Fund Managers Who Eat Their Own Cooking

An important new performance indicator is how much money a manager invests in his own fund.

Plenty of stock investors pay close attention to trades by company insiders. Investors figure that corporate executives know their businesses better than anyone else. So if a chief executive dumps all his shares, outside investors may lose confidence in the stock.

The same thinking should apply to mutual funds. When a portfolio manager refuses to invest in his own fund, investors should be wary.

In the past, few investors paid attention to manager investments, but that could change soon. Morningstar ( MORN) has been tracking manager investments for 18 months, and it has begun publishing some of the new data. While it's too soon to draw precise conclusions, preliminary evidence suggests that investors should pay attention to what managers do, says Russel Kinnel, Morningstar's director of mutual fund research. "It's likely that there is a relationship between manager ownership and how funds perform," Kinnel says.

So far it appears that managers aren't stupid. They tend to invest in cheap funds and avoid those with high expense ratios. At Oakmark Select ( OAKMX), which charges relatively low fees, every portfolio manager has at least $1 million invested in the fund. Other low-fee funds in which managers own sizable stakes include American Funds Washington Mutual ( AWSHX) and T. Rowe Price Equity Income ( PRFDX). On the other extreme is SunAmerica Growth & Income ( SEIAX), which has relatively high expenses and no investment by managers.

To be sure, you should never buy a fund solely because the manager has a lot at stake. But it pays to look at manager investments as one of several data points that you check routinely.